Are Robust Financials Driving The Recent Rally In Dundee Precious Metals Inc.'s (TSE:DPM) Stock?

Dundee Precious Metals (TSE:DPM) has had a great run on the share market with its stock up by a significant 23% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Dundee Precious Metals' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Dundee Precious Metals

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Dundee Precious Metals is:

16% = US$182m ÷ US$1.1b (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. So, this means that for every CA$1 of its shareholder's investments, the company generates a profit of CA$0.16.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Dundee Precious Metals' Earnings Growth And 16% ROE

To begin with, Dundee Precious Metals seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.6%. Probably as a result of this, Dundee Precious Metals was able to see an impressive net income growth of 28% over the last five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing Dundee Precious Metals' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 29% over the last few years.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Dundee Precious Metals is trading on a high P/E or a low P/E, relative to its industry.

Is Dundee Precious Metals Efficiently Re-investing Its Profits?

Dundee Precious Metals has a really low three-year median payout ratio of 16%, meaning that it has the remaining 84% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Dundee Precious Metals is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 20% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 8.0%, over the same period.

Conclusion

Overall, we are quite pleased with Dundee Precious Metals' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard will have the 1 risk we have identified for Dundee Precious Metals.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.